A subtle link and not always understood in half a century: A note on the investment rate and economic growth

Working papers | 2007 | N 22

Abstract

A usual policy recommendation to promote sustained economic growth it to dedicate increasing resources to the investment process (i.e. high investment rates). In contrast, a well known result of neoclassical growth theory is that the only determinant of long run growth is technological progress, not capital accumulation. On the contrary, to postulate that the investment rate has an important role to play in long run growth one needs to assume, as the new theory of growth does, that investment is capable of generating increases in aggregate productivity through externalities or some other form of increasing returns to scale. However, this qualifications are not the ones that are usually invoked when it is claimed that investment is the key ingredient for long run growth, as it is usually asserted in policy debates.

JEL classification: D9, E2, O3, O4